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Student loan interest is a tax deduction found in the adjustments to income section of Form 1040 or 1040A form. This allows you to take this deduction even if you don not itemize, or even in addition to any itemized deductions. This is great news as interest adds up a lot over time.

You can deduct Student Loans interest on loans issued for yourself, for your spouse in case you file jointly, and for your dependents. Parents who took out student loans can also participate and deduct interest from your income.

For more information about student loans and taxes visit Tax Benefits for Education.

This new education tax credit is a modification of the Hope credit. It is available for 2009 and 2010 income tax years. The maximum credit allowed per student is $2,500. 100% of the first $2,000 and 25% of the next $2,000 of qualified college and education related expenses (broad). This credit is available for the first four years of post secondary education. 40% of the credit will be refundable for most taxpayers.

The threshold at which this credit is reduced is higher than that for the Hope program. For 2009, the amount of your credit is gradually reduced or sometimes called phased out. The phase out kicks in only when your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim a credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return application).

The new American opportunity credit, chapter 2, has basically replaced the Hope credit. That will be the case for most taxpayers. However, a larger Hope credit with a maximum o $3,600 is still available for Students meeting the special rules for the Midwestern disaster areas.

In order to claim the Hope credit for 2009, you must: claim the Hope credit for at least one student attending an eligible institution in a Midwestern disaster area, and choose not to claim the American opportunity credit for any student in 2009. Calculate and see for yourself which program makes more financial sense for you.

For the tax year, you may be able to claim a Hope credit of up to $1,800 and $3,600 if a student in a Midwestern disaster area. This applies to qualified education expenses paid for each eligible student and no other expenses can be rolled under this.

A tax credit reduces the amount of income tax you may have to pay at the end. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself, which is a much better deal. The Hope credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. No free lunch here.

Your allowable Hope credit may be limited by the amount of your income and the amount of your tax.

For more information on student loans and taxes please check with your accountant. Your accountant will be able o explain you college loans law and help you take advantage of the tax credits and provisions.

As with other income tax fields student loans are no different and they have tax limitations. These limitations are listed below:

   The Student Loan Lender will send you a Form 1098-E. The amount of interest you paid on your student loans for the year will be reported on Form 1098-E in box 1.

   The maximum amount of student loan interest you can claim is $2,500 per year. Compare your box 1 value and see if it is more than $2,500. If it is more you will be able to deduct only $2,500 which is maximum you can subtract.

   The deduction is also limited by your total income for that year. If your income for a given year is under $55,000, or $115,000 for married couples filing a joint return, then you can deduct up to $2,500 in student loan interest (maximum).

   If your income is over $55,000 but under $70,000 ($115,000 to $145,000 married couples filing a joint return), then your deduction for loan interest will be prorated and it will be less than the maximum of $2,500.

   In case your income is over $70,000 ($145,000 married couples filing a joint return), then your student loan Interest is not deductible at all, and you will not be able to take an advantage of this feature.

   The phase outs for the deduction are described in more detail in IRS Publication 970. Use tax software to calculate the deductible portion of your student loan interest.

Besides student loans and tax law we also have a section on Student Loan Law for more general legal information regarding education loans.